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Countrywide sues AIG unit over its failure to cover loan losses

The legal battle could provide a rare window into the collapse of the financial and real estate markets.

March 20, 2009|Stuart Pfeifer and Jim Puzzanghera

LOS ANGELES AND WASHINGTON — A legal battle between units of Countrywide Financial Corp. and American International Group Inc. could provide a rare window into the collapse of the financial and real estate markets.

In a lawsuit filed this week, Countrywide Home Loans Inc. complained that the insurer didn't cover more than $43 million in losses from failed real estate loans, many of which were bundled and sold as securities -- even though Countrywide paid more than $342 million in premiums to insure the loans.

"This is a lawsuit between two of the most vilified companies in America," said Kurt Eggert, a Chapman Law School professor who has closely monitored the lending crisis. "There's been a lot of finger-pointing at Countrywide and certainly AIG for their roles in this."

Eggert added, "Here Countrywide displays a huge amount of chutzpah because it's suing because its loans went bad, and it claims United Guaranty should have done better underwriting, when it's the failing of underwriting by loan originators that got us into this stuff."

Executives at the AIG unit, North Carolina-based United Guaranty Mortgage Indemnity Co., and Countrywide, based in Calabasas, declined to comment. The lawsuit was filed Wednesday in Los Angeles County Superior Court.

Countrywide grew to become the largest residential lender in the country as it expanded into the kinds of mortgages now experiencing the highest rates of default. These included subprime loans made to borrowers with bad credit or heavy debt loads.

Critics complained that Countrywide systematically steered borrowers into loans they could not afford, then bundled the loans and sold them for profit as securities. By insuring the loans, Countrywide was able to improve the ratings it received from rating agencies, making the securities more attractive to mortgage bond investors.

Bank of America Corp., which acquired Countrywide last year, said in a regulatory filing that the Securities and Exchange Commission was conducting a formal inquiry into the lender and that it had responded to subpoenas from the federal agency.

In its lawsuit, Countrywide said it made significant disclosures to United Guaranty about borrowers' credit histories and property appraisals. "United Guaranty understood firsthand the risks associated with the mortgage lending business," the lawsuit said.

Countrywide was also a focus of attention Thursday in Washington, where Rep. Darrell Issa (R-Vista) released a 63-page report detailing the company's practice of giving discounted mortgages to influential people, particularly key lawmakers, staffers and other government officials.

Several prominent politicians participated in Countrywide's VIP program, including Sens. Christopher J. Dodd (D-Conn.) and Kent Conrad (D-N.D.).

The VIP program, which was extended to friends of former Countrywide Chief Executive Angelo R. Mozilo, their families and others, also included a wide range of people with connections or potential influence, including actors Ed McMahon, Roy Scheider and Uma Thurman; a Malibu sheriff's deputy; and two Los Angeles Times advertising executives, Andrew Bunnin and Jeffrey Young, the report said.

Bunnin, an advertising manager for The Times in 2004, said Thursday that he was referred to Countrywide's VIP unit by his cousin, who knew Mozillo. Bunnin, who left the newspaper later that year, said he was told that the VIP unit simply offered better service.

Bunnin said he was never asked for any favors from his job at The Times.

"The whole connection was through my cousin," he said. "It wasn't because of the L.A. Times."

Young, in the market for a mortgage at about the same time, said Bunnin referred him to Countrywide.

"I can't even recall the words 'VIP program' coming out," said Young, who was then The Times' director of national advertising. He now is a retail sales manager for The Times.

Bank of America spokesman Rick Simon said the company had eliminated Countrywide's VIP Lending Program.

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stuart.pfeifer@latimes.com

jim.puzzanghera@latimes.com

Times staff writer E. Scott Reckard contributed to this report.

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